Good Volatility, Bad Volatility: Signed Jumps and the Persistence of Volatility
63 Pages Posted: 15 Oct 2011 Last revised: 18 Nov 2013
Date Written: November 16, 2013
Abstract Using recently proposed estimators of the variation of positive and negative returns (“realized semivariances”), and high frequency data for the S&P 500 index and 105 individual stocks, this paper sheds new light on the predictability of equity price volatility. We show that future volatility is much more strongly related to the volatility of past negative returns than to that of positive returns, and this effect is stronger than that implied by standard asymmetric GARCH models. We also find that the impact of a jump on future volatility critically depends on the sign of the jump, with negative (positive) jumps in prices leading to significantly higher (lower) future volatility. We show that models exploiting these findings lead to significantly better out-of-sample forecast performance for forecast horizons ranging from 1 day to 3 months.
Keywords: realized variance, semivariance, volatility forecasting, jumps, leverage effect
JEL Classification: C58, C22, C53
Suggested Citation: Suggested Citation